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01. Predictably unpredictable

Geopolitical turmoil, economic uncertainty and unpredictability are the new normal. Fashion companies and executives must continue to be vigilant and nimble in

order to adapt to an ever-changing environment but they will increasingly focus on directing their energies towards what is within their control.

who have now come to expect the unexpected. Fashion executives are no exception. “We’re living in times that are incredibly unpredictable,” says Laurent Potdevin, the CEO of Lululemon. “And I don't think it's going to change, I think it's going to continue to be unpredictable”.

This mindset change may explain the newfound optimism amongst some of this year’s respondents to the BoF-McKinsey Global Fashion Survey. “Optimistic” was the third most cited sentiment respondents used to describe their view of the state of the fashion industry. While domestic political conflicts, policy reforms, and geopolitical instability are identified as common risks to growth, as in last year’s survey, fashion businesses globally around the world report that conditions are improving.

In 2018, fashion executives will need to accept the fact that change and instability are fixed features of the current business climate, and to focus their efforts on those aspects of the business that they can control. “You can't control everything,” saysLeviStrauss’s ChipBergh in an interview for theStateof Fashion 2018.“But we cancontrol whatour actions are. We can control whatwe're going to do. We can controlwhere and how we deployourresources, what areas of our strategy we're going to focus on.”

The State of Fashion 2018

Successful companies will need to become agile in the technical sense: working fast and iteratively, always keeping customer needs at the forefront. Truly agile organisations are paradoxically both more stable and dynamic, as the combination of employee empowerment, short development sprints and bringing solutions rapidly to customers can help a company become more nimble.9 “There’s so much that is happening all the time that you need to be quite reactive, quite nimble, quite flexible,” says Victor Luis of Coach

– adding that companies need not to lose “sight of the fact that you can’t make a lot of short-term decisions that impact the long-term health of a brand.”

Outside the boundaries of an individual company, agility will also require fashion companies to continue to build flexible supply chains and delivery models that can respond quickly when the environment changes. It also means strengthening risk management. When making investments in 2018, fashion executives need to respond to sudden disruptions, but should be wary of making decisions based solely on the anticipated short-term effects of such disruptions and losing sight of their long-term aspirations.

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them and partner with them; recognise and respect the size and the scale of the business that they have; and recognise that they could become competitors.

BoF: There are also ongoing challenges in the US wholesale business.

CB: Yes, in our largest market, in our largest channel, some of our largest customers are struggling right now. This is part of the disruption that I was talking about. The US is still one-half of our business; about 70 percent of the US business is wholesale

— you can do the maths. About a third of the company's overall results reside in this one channel and it largely comes down to a couple of very key customers.

I think it's going to shake out. It may take another year or two, and we're not accepting that our business is just going to decline in wholesale. There are other wholesale players that are performing reasonably well, including smaller chains. To some extent it's about the distribution, the number of doors that you're in and the strength of your business in those doors. As we face inevitable door closures with some of those big customers, we're looking at: where do we have opportunities to add new doors? Not necessarily our own retail business, but other wholesale customers that represent an opportunity for us.

BoF: To add to that, it's clear that the economic and political situation in the US remains ambiguous, with uncertainty around fiscal policy, trade policy, the dollar and issues with immigration. What is the impact?

CB: There are some pretty gloomy scenarios out there, whether it's border adjusted tax [or] NAFTA falling apart. Any one of these things could have a major impact on the apparel industry here in the US. I made a trip to DC two or three months ago to meet with some of the administration as well as some congressmen and senators about the border adjusted tax. For Levi Strauss & Company, if the border adjusted tax was put into place, this company would make no money, even our profitability would go negative. That's how big of an impact it would have on us. Almost 99 percent of the apparel industry is imported; the way the tax was going to work is we would've had to pay taxes on the full value of the goods that were being imported.

What's going to happen with NAFTA? Nobody really knows. We're in the midst

now of trying to negotiate, but every now and then you hear, “Well we're just going to walk away from it.” The hardest thing is the unpredictability of what's going to happen in Washington.

BoF: What's your strategy for managing through this period of uncertainty?

CB: We've been around for [almost] 164 years. We've seen 30-plus presidents and administrations come and go and we've been through it all. We've been through world wars, we've been through the Great Depression. I'm a big believer on focusing on the things that you can control. It is difficult to predict where we are heading in the current political environment in the US. We can try to influence it, but we can't control it. We can [only] control what our actions are. We can control where and how we're going to allocate the critical resources — whether it's money or people or whatever — to deliver the growth that we expect from ourselves and have committed to our shareholders.

BoF: What do you think are the themes to watch out for in 2018?

CB: One is the role of big data and artificial intelligence, and how brands and companies really begin to leverage that to do a better job of connecting with consumers and even formulating what their products and assortments look like. The second big thing is this whole fourth industrial revolution [and] the impact of digital, whether it's 3D printing or graphic printing. Over time these things are going to have an impact on the industry and how brands tap into the digital world. The digitalisation of manufacturing is going to become more of a factor in this industry over the next couple of years.

The last thing is I do think a shakeout is coming. There are going to be winners and losers. There are going to be brands that aren't going to make it. You can probably run down the list almost as easily as I can. There are a lot of brands [weighed down by debt] that are highly dependent on customers that aren't doing very well. I think [only the] strong brands are going to survive and that's why I keep coming back to the strength of the Levi's brand as one of the biggest assets we have. I'm really focused on how do we make it even stronger.

This interview has been edited and condensed.

The State of Fashion 2018

“It is difficult to predict where we are heading in the current political environment in the US. We can try to influence

it — but we can't control it.

We can [only] control what our actions are. We can control where and how we're going to allocate the

critical resources

— whether it's money or people or whatever — to deliver the growth that we expect from

ourselves and have committed to our shareholders.”

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vkNext.com/id446425943year non-Western markets will account for a greater share of global

apparel and footwear sales than Europe and North America. But how will the increasingly important regions of Asia, the Middle East, Latin America and Africa leverage their newfound status to gain even greater impact

and influence on the global fashion industry?

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longer to develop, leading to greater market maturity. In the case of Italian showroom L.A. Distribuzione, it means that Europe remains one of its strongest global market regions despite serving a very diverse international retail clientele.

“Back in the ‘90s, Japan was a big player in luxury fashion [but other] Eastern countries were a novelty and Asia was only about a few names like Joyce [boutique in Hong Kong]. The early 2000s were the first picture of the situation we’re witnessing today, where we can see big growth in Asia [and other regions],” says L.A. Distribuzione co-CEO Leonardo Cappannelli. Today, the showroom represents Loewe and Outerknown among others, but in the early years it wholesaled brands like Alexander McQueen and Balenciaga around the world.

Another veteran who has witnessed the meteoric rise of emerging market retail is Maria Lemos, director of Rainbowwave, a wholesale showroom she founded fifteen years ago in London after leading sales teams at Sonia Rykiel and John Galliano in Paris. For Lemos, it is not only a matter of growing sales volume but growing influence in terms of the number of innovative retail concepts and business models coming out of emerging markets.

“There was the Korean wave with Boon the Shop, Space Mue and Rare Market, then waves from Turkey and other countries, but that was just the beginning. Look at

The skyline of Chengdu, China featuring West Pearl Tower

stores like Homme et Femme in the Philippines, which is this incredibly curated boutique in Manila extremely ahead of the curve in a market you wouldn’t necessarily have known to be so advanced,” Lemos says.

Farfetch has been partnering with a growing number of retailers in non-Western markets. The online marketplace now serves customers in 10 languages, shipping designer fashion from over 700 partners to 190 countries worldwide. In recent years, as buyers from its non-Euro- pean store network became increasingly adventurous and avant-garde, an interesting phenomenon started taking place.

Some European customers using Farfetch have come to rely on its far-flung store partners to buy European designs that are not readily found back in Europe. Instead, they shop online, for example, from a unique selection of Raf Simons from Saudi menswear boutique Le Gray in Riyadh or Simone Rocha via Lebanese boutique Piaff in Beirut, and buy hard-to-find pieces from the likes of J.W. Anderson at South African retailer Maison Mara in Cape Town.

“I think Europe will continue to dominate the creative and craftsmanship sides of the industry, simply because they are impossible to replicate and this [European cluster] is at the heart of the industry. In terms of demand, however, this will definitely be the decade

where emerging markets will take the lion’s share of growth,” says Farfetch founder and CEO José Neves.

Asia’s purchasing power needs soft power

“For more than 1,800 of the last 2,000 years, China and India were always the two largest economies in the world,” Kishore Mahbubani told Asia One in 2016. The former diplomat and dean of the Lee Kuan Yew School of Public Policy in Singapore is a great proponent of this being an Asian-led century. “The past 200 years have been a major historical aberration [so] it’s perfectly natural for China [and] India to resume their places… all aberrations come to a natural end.”

The Asia-Pacific region currently accounts for around 38 percent of the world’s apparel and footwear sales, the largest share of any region. Europe is now in second place at around 27 percent. However, global influence is not gained solely by scale or purchasing power. What has been helping to push Asia closer to the fashion industry’s centre of gravity is a combination of supply chain leadership, tech innovation and Asian-led international investments. This is how the region will continue to gain a louder voice.

“In technology, Chinese firms are actually ahead of Western firms in areas such as e-commerce and social media,” says Neves, citing the country’s ubiquitous WeChat platform which has often left fashion

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marketers scrambling to keep up with its breakneck pace of development. Interestingly, it was WeChat’s parent company Tencent that swooped in to the rescue of Snapchat when it amassed a reported $2 billion stake in Snap in November 2017.

Asia’s clout only grows when one of its pioneering firms makes a bold move on international peers. Whether it is Alibaba Group’s recent appointment of a US-based quantum computing scientist to drive exponentially faster machine learning for its e-commerce platforms or the push by Chinese manufacturers like Suzhou Tianyuan Garments, — a supplier for Armani and Adidas — to open a T-shirt factory using advanced robotics in America’s Deep South, the innovation tide is turning eastward.

“Whoever owns the supply chain will eventually be the winner, since there are not many countries left for chasing the cheap needle,” says Gerhard Flatz, managing director of Chinese manufacturer KTC, whose Guangdong factory produces for specialist athletic and performance sportswear brands including Rapha and Mammut.

This sentiment was especially evident in October when supply chain management company Fung Group welcomed a host of venture capitalists and tech entrepreneurs to the launch of its new Explorium incubator lab. With hopes that the lab will help further accelerate the rapid prototyping of omnichannel concepts across fashion retail, the Hong Kong-based giant chose Shanghai for the lab’s location because the city is at the forefront of “new retail” in China, which in turn means it sets digital retail trends across the world.

“We’re connecting innovators who want to create digital supply chains of the future with logistics and retail innovators who want to be the best at serving the digital- ly-enabled consumer of today and tomorrow,” said Fung Group chairman Dr. Victor K. Fung. Seen in the broader context of China’s colossal One Belt One Road infrastructure project, the impact of this on future trade dynamics for global fashion players could be huge.

East Asian nations like Japan and South Korea now spend more on R&D as a percentage of GDP than many of their Western European counterparts and a culture of entrepreneurship is taking hold across much of the region.

According to the World Intellectual Property Organization, China became the first country to file one million patent applications in a year in 2015. Stringent IP protection and enforcement is a pillar of Singapore’s successful startup scene, contributing to the nation ranking third on the World Economic Forum’s 2017-2018 Global Competitiveness Index. Only the US and Switzerland score higher.

As the global fashion industry becomes more reliant on tech innovation for growth, Asia’s achievements in this realm are a growing advantage. From Japan’s cutting-edge designers using textile nanotechnology to Taiwan’s drive to carve out a niche for itself in eco-friendly high-perfor- mance fibres, the region has many things to celebrate.

But as is evident from Asian brands as diverse as Comme des Garçons and Manish Arora, fashion is as much an applied art as it is a creative industry. Most Asian nations have yet to effectively deploy soft power strategies

The State of Fashion 2018

”For more than 1,800 of the last 2,000 years, China and India were always the two largest economies in the world...the past 200 years have been a major historical aberration.“

to boost their fashion industries as well as their legendary designers naturally do.

“The soft power of my country’s made-by-hand [sector] is underestimated,” concedes Indonesian designer Toton Januar, the 2016 winner of the Woolmark Asia Prize. “The Indonesian government fought for the heritage-craft batik only when the Malaysian government stepped in to patent it.”

Something similar could be said about India’s dizzying array of artisan textiles and ancient techniques — though Prime Minister Modi’s “Make in India” campaign aims to remedy that.

In the same way that India’s vibrant entertainment industry has been underleveraged to promote the country’s fashion sector on the global stage, China has built hundreds of Hanban (or “Confucius Institutes”) to promote Chinese culture around the world yet few of them feature anything like Chengdu street style or the rise of Shanghai Fashion Week. Clearly there are many missed opportunities.

Leveraging Latin America’s cultural capital

Whether it be high culture or pop culture, one way for emerging market fashion players to have greater global impact than pure purchasing power is to leverage their cultural capital.

At the highbrow end of the scale, global fashion brands have been turning to world renowned artists and architects to boost everything from visual merchandising to marketing. A growing number of them have come from Latin America. Giorgio Armani’s collaboration with Colombian artist Marta Luz Gutiérrez for an in-store installation and Louis Vuitton’s ad campaign using a building designed by the late Mexican architect Luis Barragán as a backdrop are just two of many examples.

Beyond the region’s links with Europe and the US, however, there are other opportunities to explore. The rise of south-south trade and cooperation — exchanges between developing nations — is compelling some creative industry leaders to reassess their investment priorities.

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With Latin music now topping the international charts from Dubai to Delhi, for example, the social media channels of young Latin American reggaeton musicians represent an increasingly influential marketing vehicle for local fashion brands hoping to tap into new markets on the other side of the world.

Latin America’s “telenovelas” (soap operas) could represent another opportunity for mass market players. Mexican multimedia giant Televisa is one of the most prolific telenovela content creators in a region where product placement on TV is commonplace. As early as 2015, the company’s international sales rep told Variety that Televisa sells about a dozen telenovelas annually to 37 countries in Sub-Saharan Africa and 24 Middle Eastern and North African territories.

“I wish we, as designers, could influence…fashion as much as the soap opera stars [here] do. Their reach is outstanding,” said Dudu Bertholini, a designer who was a wardrobe consultant for Brazilian telenovela Verdades Secretas in 2015.

The formula certainly works elsewhere. Seoul’s fashion industry famously benefited from the Hallyu wave of Korean soap operas and music exports to other Asian markets. Success, however, depends on execution. While Japan reigns supreme in the 2017 Soft Power 30 global ranking, the government’s “Cool Japan” campaign was criticised by insiders for trivialising Tokyo’s globally influential fashion scene by packaging it with sectors that resonate less well abroad like J-pop music.

Building knowledge economies in the Middle East

Unfortunately, top-down initiatives don’t always suit the fashion industry. But capturing momentum from grassroots design movements and channelling entrepreneurial flair in an organic way is not easy either.

“Projects that are ignited by the government may start based on a perception of top-down. [But] the soul is created [and] enhanced by the people working on it and experiencing it and these initiatives can come to life in magical ways resulting in repeat business,” says Ghizlan Guenez, CEO of The Modist, a Dubai-based e-com- merce site that offers contemporary designer brands like Stella Jean and Maison Rabih Kayrouz to women whose religious, cultural or personal tastes lean to a modest style aesthetic.

Pointing to the framework offered by the Dubai Design District and the Dubai Design and Fashion Council, Guenez clearly feels that she has benefited from the top-down approach often used in the United Arab Emirates. The Algerian-born executive has lived in the UAE for 20 years and says that “there’s more to be done [but] the entrepreneurial engine is in full force within the UAE.”

“What is impressive is the strength and speed of initiatives taking place to enhance [and] develop the influx of talent from all over the world into the Middle East. As entrepreneurialism accelerates in the region, high levels of investment are following opportunities across the fields of art, architecture, technology and education,” she adds.

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The November opening of the Louvre Abu Dhabi is the latest example. But in neighbouring states like Qatar, there are concerns that some of its megaprojects could end up as white elephants. In Saudi Arabia, Crown Prince Mohammad bin Salman recently announced a plan to build a colossal $500 billion mega-city on the Red Sea coast near the border with Jordan and Egypt called Neom, to be loosely modelled on the “free zone” concepts in Dubai.

One area where there is a lot of optimism is education. In a bid to diversify away from hydrocarbons, the Gulf states are investing in ways to become knowledge economies. One of several new higher education institutions in the region KAUST, the King Abdullah University of Science and Technology, is a progressive research university where seminars on wearable tech and grafting smart surfaces onto textiles are becoming commonplace.

With a growing number of Western universities present in the region — such as the Paris-Sorbonne University Abu Dhabi, a Dubai campus of London Business School and Georgetown University in Qatar — the fashion education sector is likely to gain more traction too. Currently the region is served by Shenkar in Israel and branches of Esmod in Dubai, Istanbul, Tunis and Beirut. Now, however, several prominent fashion schools from Europe and the US are said to be exploring an opening in the Gulf in the coming years.

In December 2016, the Istituto Marangoni Group’s then-managing director Roberto Riccio told a press conference that Dubai had been earmarked as its next opening after Mumbai. More fashion schools are needed to meet demand from the Middle East where the global success of Lebanese designers has inspired a new generation to pursue fashion as a career. Interestingly, one of the drivers Riccio cited for a possible Dubai campus was to attract fashion students from Africa — where there is also growing demand — who could find the visa system in Europe onerous.

Africa’s ambition to leapfrog ahead

“The common phrase ‘Africa is the future’ is a reflection of how the continent is growing on its own terms and not necessarily just as ‘new market potential’ for the first world to tap into,” says Kenyan fashion PR executive Diana Opoti.

Opoti’s fashion career arc is a good case in point. After hosting the television show Designing Africa, she created a successful viral campaign called 100 Days of African Fashion that saw her travel the continent and showcase 100 different locally designed outfits on her Instagram account. It was this experimental social marketing venture that eventually led her to launch a multi-brand retail store that will bow in 2018 in Nairobi.

“Technology is one of the most visible ways we’ve ‘leapfrogged ahead’ in Africa,” she says referring to the way many African consumers skipped the landline and went straight to mobile.

“Kenya specifically is known for its innovation in technology [and] topping this is M-Pesa, the ‘SMS mobile wallet’ which became the most convenient way of making payments for millions. [It’s] so popular, in fact, that it’s now

A visitor at an exhibition at the grand opening of the Louvre Abu Dhabi

Museum in the United Arab Emirates

where 20 percent of internet users rely on mobile alone to access the internet, compared to just 5 percent in the United States. The phenomenon of digitally-savvy consumers is not limited to China. Ninety-five percent of APAC’s 1.5 billion social media users access social media via mobile devices, the highest rate globally.13

The innovation leadership fostered by this environment reaches far beyond China’s borders. The country’s outbound investments amounted to 14 percent of all global venture capital investments outside China in 2016, and the top Chinese internet companies made almost twice the number of overseas deals as US peers.14 We expect to see Asian companies continue to introduce new technology and business model innovations to the global fashion industry in 2018. A case in point is WeChat, already taking China by storm by employing the Chinese tradition of red envelopes to grow its payments user base. In addition to

messaging, users can use the app to shop or call a cab, paying for those activities using the app’s platform. The app employs both social interaction and gamification that get users to send payments to each other – for fun. Western players like Facebook and PayPal have emulated some of WeChat’s many features but have not yet adopted all of them. Asian companies’ lead on innovation and digitisation can also be witnessed in the fashion industry, from Chief Purchasing Officers in McKinsey’s 2017 Apparel CPO Survey ranking China highest in sourcing digitisation, to Japanese brands such as Issey Miyake, long known for experimenting with technology to drive materials innovation.

In 2018, more Asian brands will leap onto the global fashion scene. Asian fashion players are already

The State of Fashion 2018

beginning to increase their presence and influence globally. This year, Gentle Monster from Korea attracted investment from LVMH-backed private equity firm L Catterton Asia,15 and Anita Dongre, the Indian brand that is backed by General Atlantic, opened a store in New York.16 More designers from Korea, India, China and Japan are displaying their wares at fashion weeks in Europe and the US.

Another way Asian players are expected to assert their power is by reversing the old global expansion pattern of Western companies moving eastward, to Asian companies moving outbound. Some companies will follow the lead of Urban Revivo, a Chinese fast-fashion player making inroads in Europe. Outbound Asian investment is also expected to take the form of increasing ownership stakes in international fashion companies. Recent examples include JD.com’s investment in Farfetch, and the acquisition of both Italian Cerruti and Gieves & Hawkes by Hong Kong-based Trinity, which later embarked on an ambitious expansion program in the UK and China. Top positions at the acquired companies will more frequently be filled by Asian leaders.

Asian fashion companies’ international ascendancy will go beyond sales and customer engagement, and move into infrastructure and other assets. Many Asian companies are already making large investments in Africa to develop new apparel sourcing hubs to take advantage of lower labour costs and proximity to both raw materials and consumer markets in the West. For example, the recent interest in Ethiopia as a sourcing destination is partly driven by Asian companies, with more than half out of the 124 foreign investors that expressed an interest in Ethiopia’s textile and clothing sector during the first quarter of 2017 being Chinese; and many Chinese, South Korean and Indian companies are already making investments in the country.17 Yuemei Group is one example of a company that has moved significant production to Africa. Such strategic investment to secure access is only likely to grow as Asian companies increasingly look outward and take a more central position on the global fashion stage, with some surpassing their Western peers in terms of innovation, investments and expansion.

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each day. Increasingly, consumers are trusting others to curate the information for them. Many consumers perceive the lifestyle of the influencers they follow to be more authentic than traditional company branding efforts, as illustrated by the fact that 9 out of 10 consumers trust an influencer more than traditional advertisements or even celebrity endorsements.20 This has led to more influencer endorsements, in addition to product reviews and referrals from peers becoming an important source for curation. In our view, fashion companies will begin to think more about how best to leverage influencer marketing, peer reviews and social media engagement for results that are most relevant to the modern customer. Yet, while influencers are a powerful channel, working with them is not always straightforward. The wrong ambassador can undermine a brand’s authenticity.

The year 2018 will also witness more fashion brands that successfully use data to provide personalised curation. One example is Stitch Fix, which serves as a personal stylist, using an algorithm to deliver personalised packages of pre-assorted clothing and accessories to consumers monthly. With this business model, Stitch Fix in 2016 realised revenues estimated at $730 million. Another example is Affinity, which has a vision of creating a “Pandora for fashion,” recommending styles and looks based on algorithms. But being personal is not enough – personalisation must be experienced as relevant and timely, ideally offering surprising and complementary items, and done in a way that does not feel intrusive.21

Consumers will appreciate products that are tailored to their individual needs. Mon Purse, for example, offers customised handbags, partly enabled by new technology such as 3D printing, 3D knitting and laser censors, as shown by Adidas’s “Knit for you” pop-up store that produces bespoke products in just a few hours. Mytheresa.com offers customers the opportunity to personalise Gucci trainers online. Customisation will range from smaller adaptions (like embroidery in store) to pre-designed items such as colour combinations that bring a personal touch, to products designed almost completely by the customer.

The State of Fashion 2018

The concept of personalisation – from webpages and promotions to customised products

– has been around for a while. Yet even though demand for individualised and curated fashion is evident, most fashion companies are not yet providing it at scale. Many seem to struggle with turning customer data into intelligent and actionable insights, and few have managed to implement one-to-one tailoring or deploy the technology effectively. But many fashion brands have recently made big advancements in digital, data analytics, and mass-customisation in production, the prerequisites for delivering personalisation at scale.

We expect 2018 to be the year when leading fashion companies will begin delivering on personalisation in earnest, and when the ability to create individualised products will become a source of differentiation. The leaders of the pack will leverage data and technology like machine learning to provide cutting-edge individualised curation and tailoring for consumers that takes into account purchase journeys and customer feedback; to increase relevance of their storytelling and contextual channels; and to refocus on creating products that are distinctive.

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